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Former U.S. Treasury Secretary Timothy Geithner was in town on Nov. 3 to discuss his new book, “Stress Test,” about the Great Recession of 2007-09. The visit was part of the University of Louisville Kentucky Author Forum, and Geithner was interviewed by New Yorker magazine columnist James Surowiecki.

Geithner was at the center of the federal government’s response and reaction to this crisis, the worst faced by the United States in 75 years. Many of the initiatives were controversial at the time, such as TARP and big bank bailouts. Steep losses by individual homeowners facing plummeting property values or underwater mortgages were a startling part of the crisis that seemed to spiral and feed on itself.

One of the lingering and most powerful reactions to the government’s response to the financial crisis is the perception that the big financial institutions such as Citibank and Stanley Morgan received massive financial assistance from the federal government, with no penalties or prosecution against them, while individual investors or homeowners were hung out to dry. Geithner offered his explanation at the Kentucky Author Forum:

What governments do, what politicians do, they confront the panic and they look at the political costs, the sense of injustice in trying to protect the system from collapse. It looks like you’re rewarding the arsonists. And they say, “I’m not going to do that,” and they wait, and they sit there and they hope some better option will emerge, and the arsonist’s firms may go down in flames.

You could say the Great Depression was a natural experiment in that strategy, but we’ve got a handful of examples since the Great Depression of countries experimenting with that strategy and it wasn’t very good for them either. It’s that sense that what’s necessary seems immoral, and it’s a confusion about the morality of choices, because there is no other way to protect the innocent victims of a failing economy from a financial panic than to try to keep the lights on in the financial system, and there’s no way to keep the lights on in the financial system without trying to put money behind the system {…] so the idea that somehow there’s a moral choice that’s better economically for the average victim of crises — the idea that there was a way to protect them and at the same time let the system collapse is I think an illusion, and it’s a very costly illusion because look at the graveyard of crises in the last century or two centuries.

It’s mostly terrible when governments draw the wrong lesson from their view about what is just, and what is politically expedient. It’s not a hypothetical thing, I mean you can look at the alternate choices countries have made and see, were they better off when they let the system collapse to the point they had to nationalize everything? Was that a better system? Was that a better outcome economically? I don’t think so.

Listen to the full Kentucky Author Forum conversation with Timothy Geithner here: